No one likes to think about losing their, but it can happen for a variety of reasons. And when they do happen, it can take a long time to get back on your feet. The average period of unemployment, according to the Bureau of Labor Statistics, is 25 weeks, just over six months. Taking an honest look at your financial picture, do you have enough cash to support yourself for that length of time? If not, it might be time to build an emergency fund, if only for your own peace of mind. Here are a few simple steps you can take to set you ahead of circumstances you can’t control.
Depending on your job flexibility, your emergency savings balance can be more or less than the average six-month recommendation. If you have a secondary source of income — from a rental property or a freelance practice, for example — you may be able to squeak by with a smaller emergency savings balance. Also, if you’re relatively sure you’re in high demand and could land another job easily, you may not need a full six months of income saved. But despite these factors, you should also take into account your personal risk tolerance. If having an emergency fund helps you sleep well at night, then by all means, increase your savings.
Before you decide how much to save, take a look at your current cash balance. Could it serve as your emergency fund? If you do need to tap into your savings accounts, how would that set you back in terms of retirement savings or eventually buying your own home? If you’re uncomfortable with your current amount of cushion, start building your accounts with a dedicated contribution each time you get paid.
Even if money is tight, you can’t afford to forget about an emergency fund. To build savings quickly, put away larger cash inflows, like your annual bonus or a tax refund. This may mean delaying something else you’ve been planning, like a home purchase or a vacation, but it’s worth it if an emergency savings fund is a top priority for you.
The experts at NerdWallet recommend placing money in a savings account — rather than a CD, which specifies a length of time during which you can’t withdraw your funds — in order to give you the quickest access to funds tagged for emergencies. If your rent is due next week and you’re suddenly missing a paycheck, you don’t want to be stuck in a waiting period to get your cash and pay your bills.
The more often you look at the emergency savings, the more tempted you may be to spend it on nonemergency items. There’s a big pile of cash just calling your name, right? So, try as best as you can to forget about this stash of savings until you’re really facing a job loss. Set up an automatic savings plan until you hit your target balance, and then lock the account as best as you can. Start a secondary savings account with the intention to use it for something other than a job loss.
If you’re setting aside funds for future use, make sure to have a clear idea of how you’ll use them. Remember, your emergency fund isn’t a down payments or vacation money. Segregate your accounts accordingly, and make sure the funds earmarked for emergency are truly used for this purpose.